Nemak SAB de CV
BMV:NEMAKA
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Nemak SAB de CV
Earnings Call Analysis
Q3-2023 Analysis
Nemak SAB de CV
The company reported a robust top line, attributing a 4% year-over-year growth to increased production from customers and successful new product launches. Despite facing inflationary pressures, they have progressed in recovery efforts and anticipate wrapping up the remaining negotiations by the fourth quarter, with retroactive recovery expected for the entire year. The company won new contracts worth approximately $230 million, of which $200 million is in the ICE powertrain business, creating a stable cash flow to support expansion into the electric vehicle (EV) market.
The e-mobility, structure and chassis application segment is forecasted to generate over $600 million in revenue this year, which marks a significant increase of 28% compared to the previous year. The firm has achieved this milestone within just seven years, a feat that notably took them two decades in the ICE powertrain business, demonstrating an aggressive and successful pivot towards e-mobility.
Light vehicle sales have grown across various regions including the United States and Europe, driven by pent-up demand and improvements in supply chain conditions. However, a slight decrease in sales was observed in China. In terms of production, North America and Europe saw increases, whereas Brazil experienced a production decrease due to inventory optimization strategies. China's production figure, unlike its sales, showed an uptick.
Revenue has risen to $1.3 billion, a 4% growth from the prior year, with EBITDA also increasing by 4% to $164 million, buttressed by a stronger top line. However, regional performance varied, with North America seeing a slight increase in revenue but a reduction in EBITDA, Europe reporting revenue and EBITDA increases, and the rest of the world displaying a minor revenue dip but an impressive EBITDA jump of 32%.
The company plans to maintain a disciplined approach to capital allocation, targeting investments in profitable segments and sound relationships with clients. Notably, future capital expenditure (CapEx) levels are projected to fall below this year's range of $490 million, contingent on additional business acquisitions.
Despite a challenging environment marked by strikes, the company has shown resilience with no substantial impact on volumes. They are prepared to reduce costs as necessary. Furthermore, they have been granted shareholder approval for a stock repurchase program up to MXN 500 million, indicating confidence in current stock valuation and future profitability.
The company has access to more than $800 million in credit lines, part of which are committed, ensuring continued funding for CapEx needs. The additional debt incurred as a strategic investment in new business segments, along with seasonal working capital effects, led to increased debt levels in the third quarter which are expected to decrease in the fourth quarter. The bonds’ performance, such as those related to Metalsa, is influenced by various broad market factors rather than any specific company characteristics.
The EBITDA per unit is expected to align with or slightly exceed guidance, likely to increase further with the growing mix of more profitable new segments. Regarding free cash flow, improvement is anticipated in the fourth quarter due to working capital reversals, which should compress the leverage ratio to levels approaching 2.5 to 2.6 times net debt-to-EBITDA by year-end.
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Good morning, everyone, and welcome to Nemak's Third Quarter 2023 Earnings Webcast. Armando Tamez, Nemak's CEO; Alberto Sada, CFO; and Denise Reyes, Investor Relations Officer, are here this morning to discuss the company's business performance and answer any questions that you may have. [Operator Instructions]I will now turn the call over to Denise Reyes.
Thank you, operator. Good morning, and welcome, everyone. We very much appreciate your participation. Armando Tamez, our CEO, will lead off today's call by providing an overview of business and financial highlights from the quarter. Alberto Sada, our CFO, will then discuss our financial results in more detail. Afterwards, we will open for a Q&A session, which participants may access via dial-in or webcast.Before we get started, let me remind you that information discussed on today's call may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions you not to place undue reliance on these forward-looking statements. Nemak undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.I will now turn the call over to Armando Tamez.
Thank you, Denise. Hello, everyone, and welcome to Nemak's third quarter 2023 earnings webcast. During the quarter, we continued to see a strong top line, driven by our customers' increased production as well as new product launches. In parallel, we made progress on the inflation recovery front, successfully addressing these impacts to our cost. We expect the remaining negotiations to be concluded by the fourth quarter, resulting in retroactive recovery for the full year.Altogether, volume dropped a 4% top line improvement on a year-over-year basis, and EBITDA was 4% higher as well. The combination of volume, product mix and inflation recovery enabled us to offset a large portion of the impact of the Mexican peso appreciation and launching expenses. The UAW has also driven business decision this quarter as the strikes against the Detroit 3 OEMs in the U.S. continue, while we saw no interruptions to our production requirements during the third quarter -- the fourth quarter could potentially present reductions in volume as an effect of the continued escalation.Across the American business units, we implemented private restrictions and reconsideration of all expenses and are prepared to deploy [indiscernible] production schedules, fully ahead of vacation base and major preventive maintenance. Actions such as this and others taken during the extraordinary circumstances like the COVID-19 pandemic have proven effective and continue to be a part of our contingency playbook.Moving on to commercial activity. This quarter, we won contracts that amount to approximately $230 million, which includes $200 million in the ICE powertrain business. The vast majority of contracts in this segment are replacement agreements for components of Nemak [indiscernible] manufacturing and will continue to produce for the next vehicle generations. Altogether, generating a reliable stream of cash flow to continue expanding our presence in the electric vehicle market.In addition to Powertrain awards, we made further strides in the e-mobility structured and chassis application segment, securing additional replacement contracts for USD30 million. We will rely on existing facilities to meet this production while continue to capitalize on our expertise in this segment. Meanwhile, the order book in the e-mobility structure and chassis application segment continues to account for USD1.72 billion, up held with replacement contracts, which signals the long-term market share that is materializing for this business.I am also pleased to announce that the majority of awarded contracts for electric vehicles in the European market will be satisfied using green alloys. Hence, we are moving forward in lockstep with the automotive industry in our shared goal of reaching carbon neutrality.Turning to strategic execution, I would like to share that the substantial progress we have made in our transition towards electrification. As of today, 15 of our 28 existing facilities are producing components for e-mobility, structure and chassis applications. We have invested in greenfield facilities, and we have successfully adopted existing assets to accommodate components intended for the hybrid and full electric market.Overall, I am pleased to recognize the successful quality of these facilities, transitioning and building expertise in this new business avenue, while maximizing our traditional capabilities. We continue making inroads in the battery housing market, that we are currently producing more than 15 different models, serving multiple customers and regions. I am confident that the technical knowledge and expertise that has been built around these components is crucial to the scale this business will require.Our battery housing meets the highest quality standards and we have been able to engage actively with our customers from the earliest stages partnering in the critical process of design and engineering. The expected run rate for the e-mobility, structure and chassis application segment this year continues to be more than $600 million in revenue, a growth of over 28% on a year-over-year basis. We have reached this milestone just 7 years after entering this segment, an achievement that took Nemak 20 years to reach in the ICE powertrain business.I remain confident that we're taking the right steps in this transformation journey, while leveraging our position in the traditional business. Main highlights for the period that include nominations in both categories of the PACE Awards. We're a finalist with a subframe prototype and innovation that reviews weight by 45%, replacing a 3 steel component assembly with a single cast aluminum part. We're also a finalist with an aluminum structural component that is in active production with a redesign that resulted in a 30% weight reduction while using 100% renewable electricity and 80% recycled materials.The same structural component was also named for the Altair Enlighten Award in the lightweighting category. I would like to point out that this component was engineered using a black box design concept, a process in which Nemak takes a 100% leading role in the design of the component. Recognition granted by these 2 respected associations confirms our position as a global pioneer in lightweighting solutions. Our commitment to quality, technology and higher standard was recognized this quarter as well with the highest quality rating from GM in South America after 0 quality rejects for 12 consecutive months.Addressing our ESG agenda, I am proud to announce that we have been rated by the EcoVadis Sustainability Assessment for the fifth year in a row. This year, for the first time, Nemak was awarded with the platinum metal, a recognition that is reserved for the top 1% of assessed companies globally. The EcoVadis methodology is built on international standards to evaluate how well the company has integrated the principles of sustainability and corporate social responsibility into their policies, actions and results. Also, for the first time, we have been distinguished as a top employer in Brazil, joining the U.S., Mexico and Germany in this prestigious achievement.The certification awards, the practices and processes we have in place in Nemak that are dedicated to different dimensions, including people strategy, employee training and development and alignment to our values. We also continue moving forward on our diversity and inclusion journey. Nemak is enrolled in the forward faster initiative of the United Nations Global Compact, responding to a powerful call for business to accelerate action and make a bigger faster impact on gender equality by 2020. Additionally, we have signed the diversity charter for Germany, a certificate that we enforce our commitment to create a positive and bias-free work environment, helping to fully unfold diverse potential that will advance our organization.This concludes my remarks. Thank you for your attention. And I will now hand over the call to Alberto, Nemak's CFO.
Thank you, Armando, and good morning, everyone. To begin, I would like to provide an overview of industry dynamics, followed by a summary of our financial performance over the past 3 months. During the third quarter, light vehicle sales in our main regions continue to grow on the back of pent-up demand and continuous improvement in supply chain conditions amidst a backdrop of higher interest rates. Therefore, the United States and Europe showed an improvement of 17% and 18% year-over-year, respectively. In Brazil, light vehicle sales increased by 13% compared to the same period last year due to sustained activity in the region. In turn, China recorded a slight decrease in sales, consistent with softening economic conditions in the region.In terms of light vehicle production, North America and Europe increased 8% and 14% year-over-year, respectively, consistent with trends in global sales figures and relatively unaffected by the auto worker union strikes in North America. In Brazil, however, light vehicle production decreased by 10%, mainly due to ongoing inventory optimization strategies. Finally, in China, light vehicle production increased 13%.Moving to our financial results, volume increased 6% compared to the same period in 2022, adding up to 10.6 million equivalent units. This was largely driven by higher customer production on the back of positive industry dynamics. During this quarter, we continued to capitalize on the secular growth of electric mobility through new product launches. This segment continues to strengthen its strategic position to cater to the incremental demand for lightweighting solutions in this market, gaining relevance in long-term value creation. During the quarter, revenue was $1.3 billion, posting a 4% year-over-year growth due to higher volumes and the depreciation of the euro, which was partially offset by a decrease in aluminum prices.Turning to EBITDA, we saw a 4% increase against the third quarter of 2022, amounting to $164 million. This was the result of a stronger top line, incremental growth in our e-mobility, structure and chassis segment as well as inflation recovery negotiations, although these factors were partially offset by the effect of the appreciation of the Mexican peso and launching expenses primarily in North America. Consequently, EBITDA per equivalent unit for the quarter was $15.5, slightly lower than the same period of 2022.Operating income for the quarter was $76 million, 5% below the same quarter of 2022 as higher depreciation associated with an increase in fixed assets more than offset the increase in EBITDA. In turn, net income for the quarter was $25 million compared to $19 million in the same period of 2022 as the accounting effect of foreign exchange in the balance sheet benefited the net financing costs in the quarter.Moving to our balance sheet. Net debt at the end of the quarter stood at $1.6 billion, 5% and 23% higher compared to the end of last quarter and to the same period of last year, respectively, reflecting seasonal changes in working capital as well as strategic investments. Net debt to EBITDA was 2.8x versus 2.3x and interest coverage ratio was 5.5x versus 8.7x at the end of the same period of last year. By the end of the quarter, our working capital increased by around $90 million on a sequential basis due to temporary effects associated with tooling and seasonality.During the quarter, capital expenditures totaled $129 million, consistent with our capital allocation strategy towards the e-mobility, structure and chassis segment. It is worth noting that our investment decisions are grounded in a strategic and disciplined approach, ensuring that they contribute positively to our financial position and align with our long-term strategic objectives.Moving on to our regional results. During the quarter, North America revenue was $718 million, up 2% year-over-year, driven by higher customer production, although this was partially offset by the decrease in aluminum prices. Meanwhile, EBITDA decreased 5% compared to the third quarter of previous year to $86 million, mainly due to launching expenses and the effect of the appreciation of the Mexican peso against the U.S. dollar. As Armando mentioned, we remain observant of the developments on UAW discussions with the OEMs, and we are ready to implement further measures to counteract any potential negative effects of this situation.In Europe, revenue was $406 million, 11% higher year-over-year attributed to higher volume and partly benefited by the appreciation of the euro. EBITDA in the region was $57 million, 13% higher than the same period of last year due to improved product mix, customer negotiations on inflation impact and currency translation effects.Rest of the world revenue was $149 million, $4 million lower than last year due to lower aluminum prices. However, EBITDA was $21 million, 32% higher than in the same period of last year on the back of an improved product mix and sustained operating efficiencies.Wrapping up, Nemak continued to navigate the dynamic automotive industry landscape with financial discipline and prudent capital allocation. We remain confident in our capacity to continue driving long-term value creation while pursuing a stronger and more resilient balance sheet.This concludes my presentation. I will now turn the call back over to Denise to open up the Q&A session.
Thank you, Alberto. We are now ready to move on to the Q&A portion of the event. As a reminder, participants may ask questions directly via dial-in, or some questions in writing via web. Operator, please instruct participants calling in on how to play their questions.
[Operator Instructions] Our first question comes from the line of Alfonso Salazar with Scotiabank.
I have several questions, and I will focus on 3 only. The first one has to do with working capital, the increase that we have seen and just your expectation for the fourth quarter and for 2024. The second question is regarding your order book. It's now flat at $1.7 billion. And at the same time, what we see is slow in EV sales. We see GM for now Tesla, basically saying that they need to be careful with production because of the levels of sales that they are forecasting. So the question here is how this affects your to -- your legacy business and growth for the new business lines that you have, especially EVs? How do you see this moving ahead?And the last question that I have is regarding the investigation in Europe against subsidies given for production of EVs in China. How -- I understand that this is very different for French or Italian OEMs than German OEMs. So just trying to understand, assuming that there are higher tariffs for Chinese cars going into Europe, what is the implications for Nemak if that was the case? So those are the 3 questions that I have for you.
Let me answer the first one, and then I'll pass it on to Armando for the second and third one. Related to working capital, as I was indicating earlier, this is a seasonal effect, and we also have a little bit of additional tools. Tools normally, we purchase them for our customers and then we impose them back to them. So those 2 elements will drive working capital down on the fourth quarter in -- consistent with what we have seen in the past -- in previous years. So we should see a reversal of most of the increase that I described during the call.
Related to our order book, I think we are very pleased with the $1.72 billion. We need to remember that not in every single quarter, there are, let's say, new decisions from customers in Europe, they go on holiday during the month of was the complete month. And also in the States, I think our customers were preparing for a potential strike that unfortunately will happen. What you are mentioning about, for instance, the recent announcement from GM delay in one of the plans that they have to electrify the Silverado pickup truck that is delaying at least for 1 year.I think we are well prepared to maintain -- remember that our -- what we call our legacy business is very, very strong. And I think we saw a significant improvement in volumes during the third quarter. In spite of the strike, we didn't see any reduction in the powertrain. And I think it's very important to mention that we are seeing a significant increase in appetite for larger engines. We are selling today more V8 cylinder heads and engine blocks that at any given point, in spite of the fact that everybody is talking about CO2 reductions and going green and so on, but customers, I think they prefer to go with larger and more powerful engines.And we are prepared to have both -- we have the flexibility. We're investing, of course, on the electric side as well. And also we are prepared to continue. Actually, I can share that we have been in discussion with several customers and which they are telling us that the original projections that they've made, especially in North America for penetration of electric vehicles, they see a potential reduction and they are asking us that they need us. So I think it's excellent news for us as well. So we will be prepared on both segments for the internal combustion engine as well as the electric side.And related to your third question about -- we have been looking also at this investigation by the European Union. The main concern by the European Union related to these sales of electric vehicles at a more affordable price in Europe, they are concerned that potentially some of these vehicles are coming as state subsidies. And this is something that they will need to investigate. So far, I think the investigation is going on. We don't see for us at least not in the short-term any potential effect on our company.
Our next question comes from the line of Alejandro Azar with GBM.
Hi, Armando, Alberto and Denise. Just a follow-up on your EV order book and what's happening in the industry. What are you guys with all these news of -- it seems that we're not moving so fast on the EV side. But what are you looking in terms of your quotation pipeline? Has that decreased from the, if I'm not mistaken, $1 billion that you were quoting. And you've mentioned several times that you guys are focusing on the contracts that offer the highest returns that you feel comfortable with the clients? What can you say on that front what is going to be the strategy going forward as you are very close or well ahead of your, let's say, your target of $2 billion in 2025? That would be my first question.And the second one would be on launching expenses. I was just wondering if you guys could educate us on my question is, if those launching expenses are related to the size of your contracts. And I mean if you are launching $1 billion in contracts that would have a percentage of that in terms of impact of launching expenses versus a $60 million contract.
I will answer the first one. Related to the quotation pipeline, we are seeing a very attractive, let's say, pipeline still on the electric side. We are seeing approximately $1.5 billion in front of us. I think what we have discussed before, we are going to be very selective in terms of our capital allocation. You have seen already that this year, our CapEx is in the range of about $490 million, which is a significant amount. And we are trying to be more disciplined in terms of where do we want to allocate the capital. And certainly, we will be choosing first, what we consider the best potential customers as well as the most attractive paths that would yield a higher profitability.So you will see that, again, we are not in a hurry to again, get everything that comes to our plate. We're going to be selective and choosing what we think could have the highest value in terms of profitability and also assurance from the customer that the customer will be successful with the program and also the attitude of the customer, for instance, in terms of -- in the event that the volumes doesn't materialize, what is the likelihood that they will help us, let's say, with some repricing or some support in terms of amortizing the -- on the utilized capacity?So those will be the criteria that we will be using. We have a lot of experience. And certainly, we know our customers. And we will allocate our capital where we can assure the best profitability and also the response from these customers. That is basically our strategy, Alex. And you will see that in the next quarters, we will be getting, let's say, new orders. We're confident on that. But also, as you will see as well moving forward that our CapEx for the next years will be lower than what we're investing this year.
If I may, my understood from your comment on the $30 million replaced on those contracts is by maintaining the $1.7 billion in order book, you have replaced 100% of the contracts awarded. Is that correct? Yes. Basically, it's a -- for instance, a replacement or a new, let's say, model that the customer that we have already producing one important part that they are giving us the next generation. And that's the commitment. And actually, we are very happy because we were able to reprice the product with better profitability than the current one.
If -- and I don't know if you guys can answer this one, but from -- in your projections, that 1.7 regardless of the -- that an OEM can reduce projections ahead. But on your side, are you seeing that volume fully peaked at, I don't know, 26%, 27%?
Yes. That's exactly what we are looking that the 1.7 billion will materialize, most likely at 2026 no later than 2027. Yes.
As mentioned as I mentioned, Alex, this year, our revenues coming from the electric mobility structural component and chassis reaching above $600 million, which is an increase of 28% of what we were selling last year. And it's coming with better profitability as we have talked before.
Yes. Related to your second question on launching expenses. These are obviously consistent with the amount of activity we have on the development of new business. Depending on the size of the contract, those additional expenses could be higher. In some cases, there are small programs, which also have fairly large launching expenses that they have to do with our work around the specific development of the program. Sometimes you need to run a certain amount of additional hours before the launch to make sure that you can launch with the quantity that the customer is expecting and with the volume and capacity that you have been contracted for.In some cases, there could be some extraordinary expenses that we experienced this quarter. We also [indiscernible] to the cost that we report. So normally, those would be in the neighborhood that we reported last time of $6 million, $7 million, $8 million per quarter, depending again on how much activity do we have on that front, those could be a little bit higher or non-existent.
Okay. I'm sorry to ask several questions, guys. Just a quick one. On replacement contracts on the EV side, from your history and knowledge, the CapEx on, let's say, tooling on those replacement, is that higher, the same or lower than what you were doing on the powertrain side?
Is lower, Alex, approximately about 30% less. And the other thing is that we are building our infrastructure in a modular way and using a lot of flexibility to accommodate potential, for instance, changes. And we're confident that we will invest less for replacement business in the electric mobility rather than in the powertrain.
Our next question comes from the line of Andres Cardona with Citigroup.
I have 2 questions. The first one is, now that the inflation negotiations are mostly on -- you said you expect to complete them by the fourth quarter. And last year, you had the opportunity to include the electricity cost. Could we expect now more stable margins going forward? And perhaps you can give us a sense of how much of the cost is now covered by the cost-plus formula?The second question is a very interesting slide about the dual capabilities of some of your plans. And I guess was Armando, who already mentioned CapEx will decline over the coming years. Just wanted to understand if with the current backlog that you have $1.7 billion, could we expect a normalization of CapEx around some $400 million for [ 2025 on 25% ]. Is it reasonable to think about this way because what I see from investors is, they [ perceive ] massive CapEx cycle because of the growing backlog on the electric backhaul business line.And the last one is, in the past, you mentioned the possibility to improve the disclosure for the electric vehicle segment. Is this initiative still on the agenda? Or we shouldn't expect it anymore?
Related to inflation, we are negotiating with all customers the pass-through formulas for instance, in terms of energy, not only electricity, but also natural gas and other inputs, we have been successful so far in making some adjustments with most of our customers related with, let's say, the energy cost, which we saw a huge spike after the invasion of Ukraine. And we are seeing how -- again, we are educating our customers. This is the second year that we go for that.I am also pleased to tell you that we have been making good progress also with several customers, not only with the energy, but also, for instance, with labor -- labor inflation. And this is something that we will continue because we see the need is expected globally, not only in the U.S. or Mexico, but I think it's a global issue on the manufacturing sector that labor cost will increase. And this is something that we are openly discussing with our customers. And I think most of them are the sympathetic and understanding that we need that type of support. Otherwise, we will not be able to continue supporting them.In terms of the $1.7 billion that we have, we have seen, Andres, that our CapEx will be going forward, lower than what we invested this year. Our target is to be below the 400 moving on unless we get additional business. But for instance, to support the $1.72 billion this year has been the peak of our CapEx and is going down. It's going to be down over the next few years. And related to the last topic, definitely, we are just preparing ourselves to disclose more information related to, for instance, the 2 businesses. I think we can tell you that our EV business is a little bit more profitable than the legacy business and at the right level of revenues, definitely we would make a full disclosure of the 2 different businesses.
There are no further questions over the phone at this time. And I would like to turn the conference over to Mr. Reyes for any web questions.
Thank you, operator. We will now move on to questions from the web. The first question comes from Declan Hanlon from Santander. And he tweets, I have 3 questions. First question, can you provide more details on potential contingency plans, given the ongoing UAW potential strike [ interest ] in the fourth quarter? Second question, can you discuss any plans for share repurchases, given the stock performance year-to-date? And third question, can you update us on credit lines availability that I believe remains uncommitted?
We have, as I mentioned in my speech, we have a playbook for these type of situations. And we have -- this is not the first time, unfortunately, for the industry that we have faced with some potential volume decline and we're prepared. For instance, the first issue that we put in place is travel restriction, we are, again, being more sensitive to our cost and expenses reduction. We're also being prepared for potential short weeks in which we reduce the -- for instance, the hours of labor and also adjust wage and salaries depending on the situation. We also take advantage to provide vacation to some of our people, also prepared our assets for maintenance programs and others.But I can tell you, so far, in spite of the fact that we have faced or our customers face 5 weeks of a strike, we have not seen to be totally open any reduction in our volumes. And -- but again, we are prepared as a company. We have this playbook on hand. We have shared this with the entire North American-based team, and everybody is looking again for any potential reduction to take the actions to reduce our cost structure.In terms of the share repurchase, as everybody knows, we have been authorized by the general assembly of our shareholders a potential repurchase of up to MXN 500 million. And certainly, with existing of the current price that we have on the stock, we are prepared to start again repurchasing some of our stock.
And then the third part of the question related to the credit line. As we have disclosed in the past, we have more than $800 million available of credit lines. Half of them are committed lines with procedures on [indiscernible]. The other half is what's called the uncommitted type of credit lines, which also are with relationship banks. So we have plenty of credit lines available for continued funding our CapEx needs.
We have another question from Kamaal Busari from Barings and the question is, why did you take out more debt?
Well, as highlighted before, the reason for this additional debt that we have raised along the year, which has been consistent every quarter, has to do with the capital expenditure program that we have in place, which is focused on the business transformation that we have engaged for. So we're investing the majority of our strategic investment CapEx in the new segment and the new business. And that, together with the seasonality effect of working capital drove the increasing debt [ over the ] third quarter. So we're seeing that incremental debt that we saw in the third quarter gradually reduced in the fourth quarter.
We are receiving another question from Kamaal Busari from Barings. How are you expecting UAW strike to affect your fourth quarter results?
As I have already indicated, we have not seen yet any impact at least in our volumes. But as I indicated, we are prepared to take additional cost reduction activities in the event that we see, let's say, a volume reduction.
The next question comes from Juan Patino from Sun Capital. The first part of the question reads, regarding your $1.72 billion order book, is it only related to the EV/SC segment? And in terms of net leverage, what is the target for the end of 2023.
Confirming, yes, as we have been disclosing the $1.72 billion that's our backlog of new business in the EV and SC segment. So that does not include any also additional business we have in the traditional powertrain. And related to the net leverage target at the end of 2023, we don't have a public target disclosed or any guidance around the leverage. But we can tell you that the peaks that we saw on the second and third quarter are the highest. We should be seeing that leverage ratio coming down gradually to levels close to 2.5x to 2.6x net debt-to-EBITDA as of the end of the year.
Continuing with Juan Patino from Sun Capital, the next part of his question, reads, what are the expectations on guidance regarding revenue, EBITDA and CapEx for this year? And regarding Metalsa bonds, you have -- Metalsa has performed Nemak bonds. Is this related to the great exposure of Metalsa to the U.S?
Yes. Related to the guidance, I mean those numbers are the same. I mean, we're not changing any guidance figures for the year. I think, as you can see on our figures, we are in good track to meet our guidance. We even exceeded slightly those numbers. So we're quite confident that both on revenue and EBITDA, those will be positive. And on the CapEx side, that will be consistent with our guidance plus any new business that we have been winning recently.And the question related to the Metalsa bonds. Well, we don't have any information about why that those bonds are higher or lower than ours. I think the current bonds really move up and down depending on multiple factors.
Our next question is from [indiscernible]. How have payment cadence from the D3 looked like during this period? Have you noticed any delays in placements from the North American customers? Do you expect pressures to working capital in the fourth quarter?
I mean, related to working capital, the moves that we have seen are more related to seasonality. So that's depending on the amount of production that we have on any given quarter as well as the tooling, which sometimes grow and sometimes is smaller. So we haven't seen any change in payment dynamics from our customers. Actually, they are fairly well and very predictable and consistent. And the fourth quarter is normally a reduction in working capital for the normal [indiscernible] in the year.
The next question comes from brand [indiscernible] BlackRock and he tweets, the EV and SC segment represented close to $600 million and the total sales were $1.3 billion. Is it correct if I assume that the volumes in internal combustion engine have been decreasing? Can you give us more color in the performance of this division, please?
Yes. Basically, what we are saying is that we are expecting revenues in our guidance of about $4.8 billion probably we will exceed those close to $5 billion. So what we are saying is that our run rate for the EV and structural component and chassis will be in the range of about $600 million plus, which will represent about between 12% to 13% of our total revenues.
Next question is from [ Fernando Arera ] from Compass. What are you expecting in terms of free cash flow generation for the fourth quarter and 2024?
Yes, we're going to see in the fourth quarter an improvement in free cash flow, basically coming from reversal from the working capital needs that we saw in the second and third quarter. So it should be positive. And again, that will drive our leverage ratio at least a couple of points -- or a couple of traction points lower than what we have right now. I've indicated somewhere between the 2.5, 2.6 level of net debt to EBITDA.
The next question is from Kamaal Busari from Barings. What long-term effects do you see from the UAW strikes? Will it have any effect on your own labor costs?
As we indicated, we are negotiating with our customers as we speak, also labor cost increases. And most likely, we will see a cost increase in the manufacturing sector, not only affecting our customers, but also the entire sector. And certainly, we will go. And again, I think we can explain what is the potential impact in the different regions in which we operate. And I think our customers are aware that if they don't help us, I think they would have a problem not only with Nemak but with the entire supplier industry to get their parts and the components needed. I think everybody is expecting that, yes, we will have an increase on labor costs in many different countries.
The next question is from [indiscernible] from Pichardo Asset Management. Can you provide any color on the performance of EBITDA per equivalent unit?
As you can see, the EBITDA per unit of the third quarter came more or less similar to what we had last year and is much higher than what we have been having in the year. And that has to do with a number of factors. Most of them are seasonal related to production levels as well as also the benefit that we have had associated with the negotiations on inflation that we have with certain customers. For the full year, we expect that number to gradually be aligned to what we have guided, maybe slightly higher than that. And eventually, as we increase the mix of the new segment, which has better profitability, we should be seeing that figure higher going forward. And I think it's a big achievement what we have been able to do given the fact that we have had a strong pressure associated with the currency effect of the Mexican peso against the U.S. dollars, which unfortunately weighted negative on our results. But absent of that, I think we are progressing well, and we expect continuous EBITDA per unit improvement going forward.
There are no further questions at this time. And with that, we conclude today's event. I would just like to take this opportunity to thank everyone for participating. Please feel free to contact us if you have any follow-up questions or comments, and have a good day.
Ladies and gentlemen, this does conclude today's earnings webcast. Thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.